Policy Wonk: Reducing Maine income taxes will not create jobs

Our smiling governor, with his smart Moxie tie and glib argument that income tax cuts will return more money to a town than is lost by ending revenue sharing, cannot mask the truth.

Revenue sharing holds the line on municipal property tax increases: Everybody in a town benefits. Income tax cuts give a few dollars to low- and middle-income individuals, and unfairly give huge benefits to the wealthy – the top 1 percent of individuals in the town.

Gov. Paul LePage’s call to reduce or eliminate Maine’s income tax often points to the economic success of nine states that have no income tax (actually the number is seven: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). Two states, New Hampshire and Tennessee, rely very little on income taxes. They both impose a low rate of taxation on interest and dividend income, and New Hampshire imposes an 8.5 percent corporate tax.

But there is no economic success story attributable to not having an income tax. Four of the nine states – Alaska, South Dakota, Texas, and Wyoming – are the beneficiaries of vast deposits of crude oil and/or natural gas, ethanol production, hydroelectric, and wind energy. They don’t need to tax income.

One of these nine states, Nevada, is the gambling capital of the nation. Another, Florida, is the retirement capital (and winter haven) of the nation. Again, no need to tax income.

Maine will never be in the position of any of these six states.

The three remaining states – New Hampshire, Tennessee and Washington – are hardly success stories.

New Hampshire has the third-highest property tax burden in the nation.

Tennessee has a higher unemployment rate, 6.6 percent, than Maine’s 5.5 percent, and lower per-capita income – about $37,600 – than Maine’s more than $39,000.

Washington has the most regressive tax system in the nation: Lower-income people pay a higher percentage of their income in taxes and higher-income people pay a lower percentage of their income in taxes, and its unemployment rate of 6.3 percent is well above Maine’s 5.5 percent. This is not success Maine should embrace.

Four other low- or no-income tax states – Florida, Texas, South Dakota and Tennessee – rank second, third, fourth and seventh respectively in the regressive character of their overall tax systems.

In short, without an income tax, state and local tax burdens on the poor inevitably rise, and burdens on the wealthy decline. Jobs are not created.

Unemployment in the nine low- or no-income tax states stands at 5.3 percent, little different from national and Maine unemployment levels of 5.6 percent and 5.5 percent, respectively.

If one omits from unemployment calculations the three states – South Dakota, Texas, Wyoming – where new energy resources and technologies (natural gas, ethanol, wind, fracking) have fortuitously created a windfall of jobs, unemployment in the six remaining low- or no-income tax states stands at 6 percent, well above national and Maine unemployment levels.

Finally, recent job growth data indicates that five of the nine low- or no-income tax states are growing more slowly than the nation as a whole. Two states are barely above national job growth rates – hardly a ringing endorsement of the governor’s assertion that reducing or eliminating the income tax will create jobs in Maine.

If one looks at expenditure patterns in these nine states, the picture is equally depressing. A majority of the low- or no-income tax states (and Maine) spend less per capita than the national average for essential public safety services (state and local police protection, corrections, court systems and legal services). Only the energy-rich states exceed national expenditure levels for these services.

A similar pattern is found with respect to per-capita state and local expenditures for education. A majority of the low- or no-income tax states (and Maine) spend less than the national average for these essential (human capital investment) services. Again, the energy-rich states spend more.

But Maine is not energy-rich, and it defies logic to believe that Maine will more fully meet these public safety and education needs by imposing regressive property and sales taxes while cutting or eliminating income taxes.

Maine, with relatively low per-capita income and an aging population spends more (to its credit) than the national average in some critical areas: housing, community development, welfare programs. The majority of low- or no-income tax states (unwilling to raise sufficient revenue) spend less, often much less, in these areas of humane social investment.

This mean-spirited policy debate will almost certainly follow in Maine if income taxation is reduced or eliminated. The governor’s full-scale assault on a wide range of welfare programs is a harbinger of things to come. Is this the Maine we want?

LePage’s tax policies should be rejected. The nine low- or no-income tax states are not better off than states that utilize income taxation, and in many respects they are worse off. Cutting or eliminating the income tax on the belief that this will create jobs and economic well-being is simply not borne out by the facts.

Sidebar Elements

Orlando Delogu of Portland is emeritus professor of law at the University of Maine School of Law and a longtime public policy consultant to federal, state, and local government agencies and officials. He can be reached at orlando.delogu@maine.edu.